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Wednesday, 8 July 2015

Lidasan: What we need to know about Islamic banking and finance in the Philippine setting

AL QALAM Institute of the Ateneo de Davao University has conducted intensive research and study on Islamic finance in the past three years. We have partnered with Islamic universities in Malaysia and Indonesia in order to understand what Islamic finance is all about. As we wait for the establishment of the Bangsamoro political entity, we invest our time and effort in building the social capital for the setting up of Islamic finance in Mindanao.

We have hosted seminars, fora, and international study tours to understand the principles on Islamic finance. As part of the academe, it is our mandate to generate knowledge and wealth for both Muslims and non-Muslims in the Philippines.

The following Q&A are the key points we need to understand regarding Islamic finance.

1. What is Islamic finance?

Finance is described as Islamic when it complies with sharia, a set of moral laws laid out in the Holy Qur'an and the Hadith or writings about the prophet Muhammad (SAW). In its simplest definition, Sharia forbids making money from money.

In another definition, “Islamic Banking is about the conduct of Banking and Finance operations in consonance with Shariah principles. It prohibits Riba and financing of anti-social and unethical services. It requires compliance with Shariah. It’is the fastest growing component of financial services industry. The growth rate is ranging from 15-20 percent. Right now, there are 600 financial institutions operating in more than 75 countries.”

Moreover, Islamic finance is all about sharing risk between financial institutions and the individuals that avail the principles of shariah. Thus, the two parties are tied into a longer-termrelationship with each other will the goal of sharing the risks and benefits of the particular financial transaction.

What are the current statistics on Islamic finance?

275: The number of Islamic financial institutions in the world.

75: The number of countries where they have a presence.

US$1.357 trillion: The value of the global Islamic finance services industry by the end of 2011.

£200m: The value of the planned Islamic bond being unveiled by David Cameron today.

11th: The ranking of the UK (up 4 places from 2011) in the Global Islamic Finance Report which weighs up variables like the number of institutions involved in Islamic finance industry, the size of the Islamic financial assets and the regulatory and legal infrastructure.

Is it for Muslims only?

No. It is a system of financial transactions. It is open for anyone who wants to avail himself/herself of its principles.

What is the current status of Islamic finance in our country?

In a series of meetings organized by Al Qalam Institute with Bangko Sentral ng Pilipinas, Development Bank of the Philippines, Al Amanah Islamic Bank, Muslim Chamber of Commerce, Mindanao Business Council, people's organization and cooperatives that are engaged in Islamic finance, we have learned the following:

According to Atty. Arifa A. Ala, Director–Supervision Department II, Bangko Sentral ng Pilipinas: “The BSP has been very supportive on initiatives that promote Islamic Banking and Finance in the country.”

Ala added, “We have the Al Amanah Islamic Bank, the one and only Islamic Bank in the Philippines. The growth of Islamic Banking and Finance in the Philippines is quiet very slow. These are the challenges that have seen:

a. Lack of legal and regulatory framework for Islamic Banking and Finance;

b. Tax laws and regulation;

c. Lack of secondary market. Al Amanah is the only Islamic Banking player in the system, it has no counterpart to place its excess funds;

The challenge now is how to promote Islamic Banking and Finance in our country? Many Muslims do not understand and appreciate the essence and value of Islamic finance. This is based on the fact that we lack local experts. We lack religious leaders who are knowledgeable of this field. Aside from this, we need to establish a clear and workable legal framework.

We need to understand that Al Amanah Bank is the first known and only Islamic Bank in the country mandated by law. It is licensed to do commercial and investment banking similar to a universal bank. Bank’s mission is to provide Islamic Banking products and services that adhere to the principles of Shariah. At present, the bank offers deposits and investments like savings, current and general investments under the Wadiah principle for safe keeping. They offer financing under Ijarah, Murabahah, and Bai' Bithaman Ajil. While the bank is not yet a full pledge Islamic Bank, they are allowed to do conventional banking thereby offering conventional deposits and loans.

However, Al Amanah Islamic Bank also faces several challenges in terms of legal framework, laws on taxation, and they are limited in offering Islamic Capital Market and Islamic Securities.

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